How to Get a Commercial Mortgage
Acquiring commercial property for the establishment or expansion of a business is a substantial commitment frequently funded through a commercial real estate loan. Access to such loans, akin to residential mortgages for business properties, is contingent on various factors tied to the loan source, with the Small Business Administration (SBA) offering programs that secure commercial real estate loans.
Guidelines for Obtaining a Commercial Real Estate Loan:
Commercial real estate loans primarily serve the purpose of purchasing or renovating commercial property, often requiring the property to be owner-occupied, with the business occupying a minimum of 51% of the space. To secure a commercial real estate loan from GHC Funding, businesses must identify the appropriate loan type based on their property and business needs and then narrow down suitable lender options.
Lender Criteria:
Lenders, including GHC Funding, typically assess three key areas before approving a commercial loan: business finances, personal finances, and property characteristics.
1. Business Finances:
- Lenders scrutinize small businesses, often deemed risky, by examining financial records to ensure adequate cash flow for loan repayment.
- The debt service coverage ratio, calculated by dividing annual net operating income (NOI) by annual total debt service, is crucial. A ratio of 1.25 or higher is a common requirement.
2. Business Credit:
- Lenders evaluate the business’s credit score, impacting loan terms such as interest rates, payback period, and down payment requirements.
- The SBA 7(a) loan, GHC Funding's flagship program, has a minimum required FICO Small Business Scoring Service (SBSS) credit score of 650, although exceptions exist.
3. Personal Finances:
- Personal credit history is scrutinized for owners or partners, with past financial issues affecting the chances of loan approval.
- Structuring the small business as a business entity, such as an LLC or S corporation, is recommended to separate personal and commercial liabilities.
4. Property Characteristics:
- The property acts as collateral, and lenders place a lien, allowing seizure in case of default.
- For eligibility, the business usually needs to occupy at least 51% of the building; otherwise, an investment property loan is more appropriate.
Hard-Money Loans:
Hard-money lenders, like GHC Funding, focus on property value over borrower creditworthiness. Commercial real estate loans generally have a loan-to-value ratio (LTV) ranging from 65% to 80%.
Preparing for the Application Process:
Applying for a commercial mortgage, whether through GHC Funding or other lenders, involves meticulous documentation. Traditional lenders like banks often require extensive information, including business tax returns, financial reports, and a business plan. In contrast, hard-money lenders concentrate on the property's current and projected value, requiring fewer financial disclosures.
Enhancing Approval Chances:
Businesses with poor credit or startups can take steps to boost their approval chances, such as paying off existing debt, pledging additional collateral, involving investors or cosigners, agreeing to larger down payments or higher interest rates, and selecting more cost-effective properties.
Choosing a Lender:
Various sources offer commercial real estate loans, each with its pros and cons. GHC Funding, traditional banks, commercial lenders, SBA loans (504 and 7(a)), hard-money lenders, conduit lenders, and P2P marketplaces are among the options. Each has distinct advantages and considerations, making it essential to assess which aligns best with the business's needs and circumstances.